American box-retail giant Costco to open fourth Melbourne store

Costco is continuing its expansion in Australia by lodging plans to open a fourth Melbourne store, with a proposed development at Moorabbin Airport in Melbourne’s southern suburbs.

The airport is on Commonwealth land, making the development subject to federal government approval. It is expected to be completed by 2016.

“The proposed Costco warehouse will turn an underutilised, quality urban site into a development that will bring economic and social benefit to the region through improved retail and wholesale choice at a more competitive price and greater employment opportunities,” Moorabbin Airport said in a statement.

It estimates the development will cost $35 million and lead to 810 direct and indirect new jobs. Earlier reports had pegged only 375 people would be directly employed by Costco.

The American box-retail giant launched its flagship Australian store in Melbourne’s Docklands in 2009, and has since opened a store in Melbourne’s east, with a Ringwood store opening in November. New stores are planned in Melbourne’s Epping, as well as Brisbane and Adelaide. 

Costco is one of the world’s largest retailers, and sells groceries, clothing and home wares in bulk at close to wholesale prices. It operates on a subscription model – customers pay a $60 yearly membership fee to shop there.

Despite only having four operational stores so far (two in Melbourne, and one in each Sydney and Canberra), the company has 100,000 Australian members. In October last year, Costco’s global chief financial officer told analysts Australia was its best performing jurisdiction.

”I think when we opened in Australia we got off to an incredible start, our highest per share volumes ever in a country,” Costco CFO Richard Galanti said. Perhaps because of this, the local operation was recently given a $110 million cash injection by head office to expand its Australian footprint.

Retail Doctor Group managing director and founder Brian Walker says Costco is the “next generation of supermarket”.

“The membership model certainly provides an element of differentiation to the larger supermarket players,” he tells SmartCompany.

“A cautious consumer is focused on value. Consumers are currently migrating to Costco and what they do well is including an element of the surprise, a super bargain.”

But some retail analysts are sceptical of the supermarket’s power to disrupt, saying its growth comes off an extremely low base.

Peter Esho, chief market analyst at Invast, told SmartCompany recently it was difficult to gauge Costco’s success because of its vastly different business model.

“Their concept is new in Australia, and I think the novelty around that business model is what appeals, rather than their actual prices,” he said.

The real upstart in the grocery space is Aldi, Esho added, saying the German discount supermarket chain is “shaking up the domestic supermarket space”.

“I think Costco will continue to grow, but it’s coming off a very low base. It probably won’t be a significant player in the Australian market in terms of volumes.”

The growth of both foreign-owned supermarkets is likely to mean margins in the grocery industry continue to be under pressure, Esho says.

“The biggest losers out of [the growth of Costco] will likely be Metcash and IGA.”

Companies that also offer a low-service retail model are likely to be affected by the growth of Costco.

Walker says it’s important for affected retailers to offer what Costco can’t if they’re forced to compete.

“Costco is not a high service model; it’s very much a figure-it-out-for-yourself model. They don’t want the overheads associated with service. It’s not their model, but it can certainly be the model of others.”

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